Terror Insurance Still At Risk

October 03, 2005

Hurricanes Katrina and Rita should have blown away doubts on whether the government must play an important role in establishing a safety net for the economy.

The Bush administration and Congress wasted little time in rushing to the rescue. Property-casualty insurers, too, will have to pay up. Losses from Rita are still to be tallied. Katrina's damages are expected to cost insurers at least $60 billion, triple the previous record for a hurricane, flood or earthquake. Add to that the insurance payouts from government-subsidized coverage of coastal areas and wetlands, and the bill will be staggering.

Recovering from natural disasters is very expensive, but not nearly as costly as recovering from certain acts of terror. In worst-case terrorism scenarios, losses could well exceed $500 billion, according to an industry estimate. Yet the White House and some lawmakers are expressing doubts regarding the renewal of the Terrorism Risk Insurance Act of 2002.

Insurers paid out more than $30 billion in claims, the largest in the industry's history, stemming from the attacks on Sept. 11, 2001. In the aftermath, the risk-taking business balked at taking further risks to cover terrorism without government help. Congress responded with the Terrorism Risk Insurance Act, which expires on Dec. 31.

Treasury Secretary John Snow recently told lawmakers that extending the act ``in its present form is likely to hinder the further development of the insurance market.'' U.S. Sen. Richard Shelby of Alabama, chairman of the Senate Banking Committee, said the government-subsidized terrorism insurance program has distorted the private insurance market.

Mr. Shelby is right only if he meant that without the government backing, insurers would have to charge premiums so high that most businesses couldn't afford the coverage. Moreover, more than a few insurers would quit the business of covering acts of terrorism.

It would be unthinkable to leave the coverage of losses from terrorism to pure market forces.

Extending government support indefinitely would not be right. Keeping it alive for another two or three years would be. That would give public-private planners time to develop a strategy to deal with insuring the seemingly uninsurable.

Lest anyone think that insurers are getting a handout under the Terrorism Risk Insurance Act, here is how the program works: By law, the industry is required to offer terrorism insurance to property owners who want it. Insurers are responsible for the first $30 billion in losses from terrorism. Government would then pay 90 percent of claims up to $100 billion. After $100 billion, Congress would have to step in.

For a long-term solution, think of the mirror image of the Federal Deposit Insurance Corp., which covers depositors for up to $100,000 in losses when banks fail. As banks pay premiums into the FDIC, so could insurers pay into a terrorism insurance fund regulated and only partially funded by government.

Why should taxpayers pay anything? For the most convincing answer, we refer to the words of Federal Reserve Chairman Alan Greenspan: ``There is no way that the private insurance market can handle terrorism-related risk by itself because of the very nature of the potential scope of damage.''